Polygraph Media Blog

What Will Win in the 2nd Great Tech Boom

I spent a lot of part I of my thoughts on 2011 & beyond in our industry focusing on what I don't think will work.  This blog post will be markedly more positive, at least for those companies that I think are going to make it after all.  Thinking about it, though, I think some commonalities are emerging.

But let's step back and review some concepts from Part I.  I spent a lot of time on the concept of economic viability as judged by two simple concepts -- customer acquisition costs and lifetime value (LTV).  Simply put, if your LTV after churn exceeds your fully loaded customer acquisition costs, you're a moneymaker.  If not, you're a failure.  There are lots of ways to analyze businesses, but if you comprehensively and accurately know marketing costs and LTV in what is of course an uncertain business environment, you're doing better than most.  That's easier said than done.

Now hold that thought for a moment.

I would argue to you that there is overwhelming evidence that we're in a mini-bubble, a lower-rent, better justified version of the first one (1997-2000).  There are a lot of sure signs -- new businesses getting huge valuations even in public markets, investors in those businesses trying to convince people that those valuations are indeed rational, the huddled masses listening in violent agreement (amazingly enough), venture capital raising huge new funds, and billions of dollars going into startups worldwide again.

And to repeat before I go too far, I don't think this is a terrible or irrational thing.  Social media, location services, smartphones, tablets, local/SMB services, and other sectors are getting turned on their heads a bit -- and the uncertainty/disruption creates opportunity for investors.  So please don't put words into my mouth that I'm opposed to what is happening or think it's insane, because I am decidedly *not* there.  I'm discerning, and that's fair.

Anyway, as we are at least in a mini-bubble, a lot of businesses have been created in a short period of time.  All have one thing in common: they are fighting like hell for market share.  They're fighting for attention alongside others in the startup community.  Enterprise startups need enterprise validation -- and fight for enterprises and/or agencies to adopt, promote, and pitch their products and services to decision makers.

And so what that creates is hypercompetitive frenzy, where there are probably at least 1-2 startups and often more for any opportunity you may perceive to exist in the world.  Tech is one of the most competitive markets in the world because barriers to entry are relatively low (no PP&E in the era of Amazon Web Services) and you can win with your brains, a good idea, and great sales execution.  Thus, the market is incredibly efficient at finding every glimmer of opportunity and taking advantage of it.  So you get a ton of startups seeking attention.

These startups fall into three categories in my mind, and I'm sure there are more.

• Destinations -- places that consumers and businesses are expected to visit repeatedly. Branding is critical, otherwise you're out of sight/out of mind.  Think modernized traditional media (Mashable, ReadWriteWeb, Techcrunch, Huffington Post) but also the hundreds of thousands of applications on the iPhone and Android (Gowalla, 4sq), game publishers, daily deals providers (currently), apps like Pandora, etc.  If you're a destination, you're only as good as your branding + your last trick.  Don't rest, because you can't.
• Service businesses -- organizations that provide human capital to solve specific problems for clients.  What's critical in these is to not be a commodity.  If you are providing a commodity service, you're racing to $0 margin.  If you have some competency that makes you among the best in the world, you're probably OK.
• Enablers -- groups that deliver a product, service, or data that fundamentally makes people more productive.  This can be a tangible time savings benefit, a cost savings benefit, or ideally both.  It can also be a "data benefit" -- removing barriers to data can be a huge enabler.  Think of Amazon Web Services -- it's a genius bet on the need for developers to quickly conjure processing and storage cycles to develop, run, and scale applications.  Same goes for the Apple App Store, Windows Azure, Facebook with social plug-ins that have now become ubiquitous and of course the Facebook APIs, LinkedIn for resumes and employment/employee data, arguably Twitter for media publishing and content discovery, local Austin startups Infochimps (data) and Famigo (publishing child-friendly content), and my favorite new startup, Twine.  All of these companies, in their own way and perhaps by accident, enable people to conduct business and be more efficient.

Not that all the destination business examples I listed are fads, but a vast majority will be nothing more than that because they're currently capitalizing on something that is presently *hot*.  Mashable is great and a must-read, but would it get 20m+ monthly unique visitors if tech was not hot?  We just saw Gowalla deadpool because it took advantage of the hot LBS market, but could not expand beyond that.  Arguably Groupon has cooled off because daily deals just stopped being compelling, and now as a result, they're dealing with the customer acquisition cost/LTV problem albeit as a public company.  Ouch.  Destination businesses have to grow rapidly and find ways to be essential and build brand, or they're ultimately dead.  The ones that go the VC route therefore raise a ton of cash but they're a lot more uncertain than they appear and are under a ton of pressure.

I'll defer a broader discussion of service businesses to 1Q 2012 for now.  My point today is more about disruptive technology providers anyhow.

Enablers, in my view, are where I'd focus dollars if I were an investor.  First of all, they're differentiated by their ambitions.  They are not trying to change the world, but rather to provide a useful service that other people can some way build upon -- be it technology, revenue, knowledge, data.    Ergo, their bet is on the opportunities they see more broadly.  They focus their efforts on the utility of and the benefits of the product/service they're offering *to other people*.  Some of those will win, some will lose.  But enough will win to make access and all the hard work that entails a worthwhile pursuit.  There is less direct interaction with the end customers, but rather tons of interaction with modern-day "channel partners" who can offer products and services to hundreds, thousands, or more end customers.  But the Enabler is not invested in any one per se -- it's a "portfolio theory" approach.

The one thing I think winners will ultimately have in common in the 2nd Great Tech Boom is precisely what winners of other eras have realized.  Infrastructure stands a greater chance of winning than apps, destinations, and other properties that are by definition perhaps more "opportunity" plays than "sector" plays.  It's not to say that all Destinations will fail and all Enablers will succeed.  But I'd make a pretty big bet that we'll think of Destinations fondly as relics of a past gone by, and that Enablers will as a group have much more lasting power.

The Dot-com bubble, the 2nd Great Tech Boom & Economic Viability

I suppose we are three years into the boom of this cycle in tech, and 2011 has finally given us a few IPOs -- Groupon, Zynga, Pandora, Angie's List, and LinkedIn.  Others like Facebook, Twitter, and Yelp reportedly intend to go public in 2012.  Investment continues to pour into startups, although there are signs that early stage investments are dropping slightly in favor of Series B and Series C investments into companies that are scaling to grow and eventually reach a liquidity event of their own.  Some startups like Gowalla have hit the deadpool.  Others like Hunch and ReadWriteWeb have modestly exited.  And a wide array of others are fighting for their place in the world.

If you've read this blog for awhile or seen some of my posts on Mashable and other publications, you know that I've been critical of a vast majority of new products and services that have been invented in this cycle.  But it isn't because I don't like the companies or their founders.  Quite the contrary -- I've interacted with many and like just about all of them personally.

The problem is that they all face the same underlying economic problem -- for many, customer acquisition costs are significant but there is little/no lockin.  At the end of the day, all of these businesses will have to face that core economic reality.  If it looks like there is not a chance these business can overcome the customer acquisition problem and become economically viable, I get skeptical.

Interestingly, almost all the local/SMB plays have heinous customer acquisition metrics as reported by their S-1s and other financial statements.  It's why Wall Street has not been kind to Groupon, Angie's List, et al.

As it happens in every boom cycle, a vast majority of us get intoxicated by the possibilities for both startups and newly-minted, publicly traded companies.  But those very possibilities dominate our thinking -- and we underestimate the risks and/or the costs associated with building audiences of loyal customers who won't migrate.  From a purely economic standpoint, the migration/churn problem is just as bad as the acquisition problem.

I had an exchange with Robert Scoble yesterday on Google+ where we briefly debated this very issue.  Robert is one of the better pundits out there, but in my view he's a tad optimistic because he thinks of the possibilities far more than the risks, alternatives, and customer acquisition costs.

I am perhaps the opposite -- I think in economic terms and am influenced by the last tech bubble.  People said the same thing about Priceline, vertical web sites like Pets.com and Living.com, Webvan, eBay, Amazon, etc.  The economically viable ones survived.  Those that were not died.  Optimists and pessimists were both correct, as I'm sure they are now.

When projecting ahead and thinking of the survivors of this cycle, ask yourselves which properties are truly economically viable in the long-term.  That's the only filter that matters.

It's why I continue to be bullish on Facebook -- they're mainstream and habitual.  Can they screw up?  Of course.  But the collective community of friends on Facebook makes it a part of our lives that is more or less impossible for us to leave.  Path can challenge Facebook as it is more about "close friends", but they still have an uphill battle to climb to gain mass mainstream adoption.

In the 2nd part of this blog post, which I'll release in a few days, I'll talk about other winners I foresee... and the thing that I think all will have in common when it's all over.

AOL, the Huffington Post, and the assault on local

Today is a watershed day in new media, whatever it is that we're calling it in 2011.  Why?  Because AOL is now truly doing something interesting in the content business by buying one of this cycle's best content properties, the Huffington Post, for $315 million.

Sure, AOL spent 40% of its available cash on the property.  Yes, there will be a culture clash as HuffPo is integrated into AOL.  And of course, we've heard of issues with AOL's integration of TechCrunch.  

But this isn't the same AOL that distributed tons  of these discs via mail for more than a decade.  It's a company led by someone with experience at a market leader who has a vision for the future.  That vision requires that AOL repeatedly produce profitable content -- something that old media has certainly struggled to do lately.

The TechCrunch and now HuffPo acquisitions, however, tell me that AOL has determined that it is a better strategy to buy great properties than to build them.  Why?  I'd posit three reasons:  1) these are properties that have discovered how to create quality content sustainably, 2) these properties make money, 3) AOL's experiments with Patch and Seed likely have not succeeded as they've hoped.

But the last reason isn't necessarily a criticism of AOL.  If you look at business across the United States, one megatrend that we're seeing is that big, relatively antiseptic brands are winning the war for $$ and mindshare against local businesses with local/regional flair.  Like it or not, eyeballs and attention flock to Chili's, the HuffPo, and the NFL instead of Billy Bob's Bar & Grill, the Smalltown Gazette, and high school football.  The American experience is homogenizing right before our very eyes, and as such brands that specialize in products with mass appeal will likely win in the long-term over local providers that struggle to effectively reach a local audience.  Niche businesses will survive, but a vast majority of local businesses are going to continue to suffer as the local experience gets more corporate.

I'd argue that these trends are driving the content business and will continue to do so.

We will see what happens with AOL's play -- one that puts it in Demand Media's neighborhood and clarifies competition with old media.  It's on.  I think the early advantage is in companies like AOL & Demand who are driven by the unit economics of creating content far more than old media as a generalized whole.

Old media has two other distinct disadvantages: 1) significant overhead, and 2) traditional "journalistic" standards.  But as an industry it is much, much larger than AOL or Demand Media and can still compete if meaningful changes are forthcoming.  And you can argue that neither AOL nor Demand Media have quite yet figured out how to scalably create great content for profit.  It will be an interesting battle to watch in coming years.  Consider also that of the major tech players only Apple, Yahoo, and Amazon have made major content plays.  Are Google, Facebook, and Microsoft next to jump in?

It's possible that as old media continues to be disrupted, that content is the next bubble.  We'll see how the industry responds.

Latest Mashable Blog Post - LivingSocial & Amazon

Yesterday around 1:20pm, I succumbed to the maelstrom of social media wonderment and became the 645,773rd person to buy $20 in Amazon merchandise for $10.  I reacted much like I'm sure you did -- "it's a no-brainer!"  I will use the proceeds to buy a book or two for my wife on our Kindle.

I thought I'd share some additional thoughts on the guest post Mashable was so gracious to post -- it is the second time they've done so for me.

Quick administrative note/disclaimer first... posts for places like Mashable have to be a little edgy and controversial to get shared, commented on, mentioned, and read.  The end product was a little different than my original thoughts.  They always are.  :-)

And the Mashable team changed the title... the focus of the article was really more about why the LivingSocial-Amazon deal is really the beginning of Social Commerce 2.0.  No worries.

Now, to elaborate.

First of all, what a clever way for Amazon to maximize the value of their investment.  I don't know the terms of the revenue split between LivingSocial and Amazon, but I imagine this was part of the plan all along.  Amazon makes an investment & sets aside a little extra money to cover a planned group purchase.  They use the strength of the Amazon brand among consumers to create a no-brainer deal that would help both LivingSocial and Amazon acquire new customers.  They made the amount of the transaction high enough for people to share & care, but not so high that it was a total loss for Amazon, which runs a pretty tight ship as it is.

LivingSocial gets inexpensive customer acquisition and tons of new accounts.  Amazon uses its strength in the marketplace to dramatically increase the value of its investment.  Everybody plays, everybody wins.  It was *brilliantly* executed by all involved.

As CEO of a company in the social commerce space, I can tell you that this very much fits in to the broader picture of trends we are seeing with group purchasing and social commerce:

1. The increasingly crowded group purchasing landscape has made it tougher for the various competitors to attract the top local advertisers in almost every market.  Consistent deal quality has suffered tremendously.  So there are more tanning beds, teeth cleanings, and acupuncturists -- and all of them are more "niche" businesses that are by definition less interesting to the mass market of consumers.

2. Group purchasing has therefore gotten less effective at the local level, and leading providers are now seeking top national/international brands to do group purchasing deals (e.g. Gap, Amazon, etc.).  Late entrants have struggled as, well, they're late to the game.  Margins shrink for all the "technology providers."  Advertisers aren't as happy and are getting pitched frequently as sales pressure intensifies on group purchasing providers.

3. However, consumers still respond to group purchasing as long as the quality of the deal is very, very high.  The Amazons/Gaps/best restaurants/best retailers of the world do a lot better than your aforementioned neighborhood acupuncturist.  So group purchasing (as it has been defined thus far) is less special and looks more like any other marketing tactic with every passing day.  i.e. if you are running marketing for an established and/or successful entity, you're at a huge advantage over someone who isn't.

4. Despite what a deal like this may make you believe, consumers have *no* loyalty to individual group purchasing providers today.  Consumers just want to save a buck at places where they know they'll shop anyway.  The Gap and Amazon were successful because of who they are, not because of the plumbing (Groupon and LivingSocial) that allowed people to buy gift cards.

5. Brand/corporate advertisers and their agencies can effectively run these types of campaigns themselves and they will as they get more savvy.  They'll also do so for the cost savings.  The technology is there for companies to take matters into their own hands.  Most have captive audiences already in Facebook pages and e-mail lists, among other assets.  All you need is a great deal to offer and the right social commerce middleware (which we have - yes I can say that because you're on my blog).

6. Ergo, brands and people with big audiences ultimately get more and more competitive with time, and they win in the end.  It may take ten years, or it may take two.

Whether we're talking with big, recognizable brands, major media companies, or major companies, it's all the same.  Inertia is out.  Action is are in.  Audiences are again the key. Technology helps major players tap into the audiences.

And most importantly, this LivingSocial/Amazon deal just higlights that there is no brand affinity in "deals".  Consumers will go where they can save money at places where they want to spend money. The company to scale this capability wins and becomes Groupon 2.0.

It will be a very interesting 2011 as this next phase of social commerce begins to shake out.

Groundhog Day Update

Howdy everyone.  Sorry for the time it's taken me to update this blog.  A lot of things are moving fast with our business and in the markets where we compete, and I haven't had time to maintain the blog. It has fallen way down in priorities all of a sudden.  Here's a quick rundown of the things that are keeping me happily driving to work at 7am, engaged throughout the day, and starting another half workday or more around 8pm.

Company - Last week, we launched our first deployment of MinutesNotice at QuickDFW.  Quick is a Dallas Fort-Worth Metro Area nightlife portal that supplements a print publication that is given away for free in the metroplex.  We have enabled the QuickDFW ad sales team to offer our "offers platform" to local bars, restaurants, and nightlife destinations.  It's going great so far, and we're very optimistic about how this vertical site will perform.  Expect to see bigger, broader, and more vertical deployments from us in coming months.

Market - Local has certainly heated up significantly in the last 90 days.  Even as late as the end of October, a lot of people asked me "why are you guys going after the local business/local advertising market?"  Well, it's really the wild west out there right now, but there are billions of dollars at stake as local online advertising evolves.  A number of companies have announced big plans, funding, and other initiatives that will help advance the market.  As such, we're hearing from a wide range of folks who have taken a much bigger interest in local opportunities.  It's an exciting time.

Book - Some of you may know that I've been steadily plugging away on Facebook Marketing: An Hour a Day -- a book that will be published by Sybex.  Later, I will share with you the long & strange story of how an entrepreneur like me got caught up writing a book while starting a company -- suffice it to say that it is tough but doable, but perhaps only when your business is still figuring out what it wants to be when it grows up.  Fortunately, book writing tasks just about concluded at the same time our business picked up significantly.  The book is now slated for release in April, and can be pre-ordered from Amazon.com right now.

We did make a change to the book mid-stream.  My original co-author had some time conflicts and could not finish the book.  So I'm really happy to share with you that Mari Smith (Twitter @marismith) is co-authoring the book.  Mari's late addition to the book has been a godsend.  She is a true professional in every sense of the word.  Even more importantly, she really knows social media at a deep, deep level.  Her involvement has turned a great book into a phenomenal book.  So in a sense, the book is a practitioner's guide to Facebook Marketing, but from the dual perspectives of an industry pundit (Mari) and a capital efficient entrepreneur (Me).  I can't wait for you all to read the book & share your thoughts about it.

Reviewing my 2009 predictions

It's time for the self-assessment of my predictions for the previous year.  Here goes...

Government 2.0 -- if the Obama administration earned a mandate of any kind, it is in the area of government intervention in the free market.  There will be opportunities in not just the modernization of government data systems/infrastructure, but also in helping government operate more efficiently and helping government help business.  I expect to see billions of public dollars move into areas where Web entrepreneurs can benefit.  This may be the biggest story in our industry in 2009.

Grade -- C 

Yes, modernization of government has been a key agenda item for the Obama administration.  But a few things made this somewhat of a non-story in 2009:

• Bigger problems in the economy and in unemployment,
• Government inertia despite the mandate,
• Policies driven to inject money into the economy quickly which (sadly) is counter to doing it efficiently.

The cycle begins to refresh -- the prospects for early-stage startups should improve throughout 2009.  Why?  We'll collectively snap out of the panic of 2008 and time will pass.  We'll all look ahead more optimistically to the future.  Remember, a lot of this panic has been the destruction of capital -- but a lot of it also has to do with capital sitting on the sidelines.  It will be increasingly unleashed throughout 2009.

Grade -- A-

By and large, I think this has happened.  Advances in real-time, social gaming, and social networking technologies have continued.  Economic value has been created.  In fact, a second tier of startups is emerging from these new platforms.  I don't think things have gotten crazy, but I do think that startup people are a lot more positive today than a year ago.

Forks in the road -- I don't remember a time when the major players in our industry all had tough strategic choices for the future.  Google needs a second trick.  Microsoft needs a way to make progress in advertising.  Facebook needs a business model.  Twitter needs a business model.  Loopt needs an acquirer?  Yahoo needs an acquirer.  Apple needs diversification beyond hardware.  Some will find the answers and there will be some consolidation.  The choices these major players make will determine quite a bit about the future of the Web.

Grade -- B-

Facebook and Twitter have largely figured out their business model issues.  Reportedly, Twitter is now profitable on the basis of the search engine deals and Facebook is rumored to be in a position to do $1 billion in revenue in 2010.  If that's true, WOW.

But the major players haven't really impressed me with their responses.  Clearly, Google is out in the front of the pack with a few innovations in local search and advertising that could respond to actions by the emerging social media giants.  Microsoft, Yahoo, and Apple have all done some rather incremental things to take advantage of social media in a big way -- but none have made big, bold moves to compete.  I am similarly waiting for Amazon to jump into the pool as well -- we shall see.

The cloud computing platform & developer attention fight intensifies -- "Use my API and host it on our cloud platform"  OK, I don't think we'll get to that point in 2009.  But the proliferation of web services and cloud computing platforms will only continue this year.  Open data has won just about everywhere on the Web.  Amazon Web Services will be joined by competitive offerings from Google and Microsoft.  What is common across all of this?  The need to win over early stage startups.

Grade -- C+

This has happened to some extent, although the battleground has been over social/local/geo data from startups and relatively new market entrants.  I do expect the battle over web application hosting to intensify -- just later.

All told, if I'm calculating my performance like a semester in school, I come up with a 2.68 GPA for 2009.  Eh.  The biggest issue here is my timing -- I was optimistic yet again about things happening fast.  We'll see.  Have a great remainder of your holiday!

Don't confuse me for a social media zealot

I have had a few conversations with colleagues, ex-colleagues, and current clients that lead me to believe that they think I'm a social media zealot.  While a lot of what I do is tied in some way to social networks, I find it necessary to set the record straight tonight.  Here's what I believe:

• Social media is old technology, but mainstream adoption of it is a new phenomenon.  Nobody knows for sure if it is the next wave of computing or a fad.
• I *think* that Facebook has a few big advantages that make it the leading contender for social media dominance.
• But it is entirely feasible that the great advancement of the social networking age is not social networking, but rather the mainstream adoption of real-time data/information.
• Should things move in this direction, Twitter is undeniably in the lead here as they truly own (shaky as it is) the infrastructure for this along with a fairly large user base.  But it's too early to tell whether or not they'll actually win because switching costs are relatively low and Twitter is probably still a little too buggy to be considered "reliable infrastructure".
• I would not be shocked at all to see a major player (Microsoft, Google, Amazon, Yahoo!) launch and have some success with a Twitter-like product.
• The combination of blogging, micro-blogging, and social media have created a truly democratized platform that allows anyone to be a publisher.  This has been discussed ad nauseum by people in technology and observers.  However, changes to consumer behavior as a result of these things have made the dissemination of information far easier for "trusted" sources.  Very few things actually need to be printed anymore now that the infrastructure has caught up to consumer behavior.  Or is it the other way around?

Perhaps most importantly, all of this means that Internet Marketing has gotten a lot more complicated.  At one time, you just had to rank high on search engines.  Then the opportunity came about to buy space at the top of search engines.  Now to be totally effective, you have to do both of those *plus* make strategic decisions & execute on social media, Facebook, Twitter, employee blogging, and "real-time" customer service.

We don't have new social media opportunities today, but we do have new internet marketing opportunities.  Social media opens up bi-directional communication with previously anonymous customers.  It's an evolutionary, not revolutionary, change that requires you to think more holistically than ever before.

Quick Hits - May 5, 2009

It's been awhile, so here's another edition of Quick Hits.

• If Twitter doesn't have a few bidders at this snapshot in time, I'd be shocked.  Just about all the major tech companies would benefit from owning Twitter.
• Once everyone knows Twitter's next step, a series of competitive products will emerge from those who don't acquire them.  Then the aggregators will emerge like they did in instant messaging (Trillian, Meebo), search (Metacrawler, Dogpile) and social media (Flock, FriendFeed).
• Nobody is talking about Amazon outside of cloud computing.  I expect them to break out from cloud computing to do a much broader range of things for companies over the next few years.
• The Apple/Twitter thing may just indeed be rumor, but remember that Amazon, Google, Microsoft, Apple, Yahoo, etc. are all looking to keep growing at impressive rates to keep investors happy.  As time passes, they'll get closer and closer to each other.  There will be winners and there will be losers.  Winnners will be more aggressive in new areas (e.g. Amazon) while losers will sit around and rely on the past for future success.  This is what also will drive the next wave of M&A for startups, as well as the next wave of... gasp... IPOs.
• If I'm a forward thinking major tech player, I have to look at local online advertising as the next big growth opportunity.  An 18%+ CAGR over the next 4 years with potential well beyond that looks pretty good in an environment when everything else is deflating.
• Along those lines, Marchex, with a $125m market cap depressed in part because of ongoing reinvestment in 300k+ domain names, would be a pretty good deal for a variety of tech companies looking to make a dent in local advertising.  I am not sure what they are doing with social media though.